2006 (11) TMI 650 - HC - Income Tax

Validity Of Assessment framed in the status of AOP - Undisclosed sources Of Income - bogus purchase - income earned by preparing fake purchase vouchers and rental bills - Whether, in determining the taxable income of the assessee, the Tribunal should not have given due regard to the legitimate outgoings in the form of entire purchases of gas cylinders but for which the returned income could not have been earned? - HELD THAT - We find that the applicant is a partnership firm duly constituted under the provisions of the Indian Partnership Act, 1932. The registration, under the Act, has been refused by the Assessing Authority on the ground that the income which has been earned by preparing fake purchase vouchers and rental bills and also other incorrect means, have not been distributed by the applicant. The existence of the firm has neither been doubted nor disputed by the authorities. Only the registration has been refused. Thus, for the purposes of assessment the provisions of section 183 of the Act would be applicable. Even in the assessment order we find that the Assessing Authority had loosely described the applicant to be an AOP only on the ground that the registration has been refused. The Income-tax Officer while making the assessment had proceeded to compute the income of the applicant treating it to be a firm. However, the status of AOP has been mentioned only because the registration of the firm has been refused. In fact, the assessment has been made in accordance with section 183 of the Act. The CIT(A) has rightly corrected the status from that of AOP to URF as it was only an error. It is to be remembered that u/s 251 of the Act the appellate authority has been conferred a very wide power while deciding the appeal. It includes power to correct all the errors which may have crept in the order under appeal. In the present case we are of the considered opinion that the Income-tax Officer had only committed an error in mentioning the wrong status of AOP instead of URF in the assessment order which error has rightly been corrected by the CIT(A). Whether the Tribunal should have given due regard to the legitimate outgoings in the form of the entire purchases of gas cylinders or not - In the present case we find that the CIT(A) as also the Tribunal has recorded a categorical, finding of fact that the applicant did not make purchases to the extent he has shown. The purchases in question have conclusively been provided to be bogus. If the purchases of the gas cylinders have not been made and on the other hand have been found to be bogus by all the authorities including the Tribunal, the question of legitimate outgoings in the form of purchases of the gas cylinders would not arise. Therefore, the Tribunal was justified in not giving benefit of the alleged amount spent towards the purchases of gas cylinders. Thus, we answer all the questions except the first two questions referred to us in Income-tax Reference, referred to us, in both the Income-tax References, in favour of the revenue and against the assessee. In view of our aforesaid opinion, the remaining questions have become academic and are returned unanswered. However, on the facts and in the circumstances of the case, the parties are left to bear their own costs.

Issues Involved:
1. Validity of assessment made by the Income-tax Officer on an 'Association of Persons' (AOP) based on the return filed by a partnership firm.
2. Tribunal's justification in not following the High Court's decision in CWT v. J.K. Srivastava and Sons.
3. Tribunal's correctness in holding that the assessment on AOP based on a different 'person's' return was a clerical/technical mistake rectifiable by the first appellate authority.
4. Whether the assessment order on AOP suffered from a serious jurisdictional error.
5. Consideration of legitimate outgoings in determining taxable income.

Detailed Analysis:

1. Validity of Assessment on AOP:
The Tribunal held that the assessment made by the Income-tax Officer on an AOP based on the return filed by the partnership firm "Deoria Oxygen Company" was valid. The Court noted that the applicant was a partnership firm under the Indian Partnership Act, 1932, and the registration under the Income-tax Act was refused due to the firm not distributing the income earned through fake purchase vouchers and other incorrect means. The assessment was made under section 183 of the Act, applicable to unregistered firms (URF), and the Income-tax Officer's mention of AOP was an error corrected by the Commissioner of Income-tax (Appeals).

2. Tribunal's Justification in Not Following the High Court's Decision:
The Tribunal did not follow the High Court's decision in CWT v. J.K. Srivastava and Sons, as it was rendered under the Wealth-tax Act and not directly applicable to the Income-tax Act. The Court agreed with the Tribunal, noting that the principles laid down in the cited case were not applicable to the facts of the present case.

3. Clerical/Technical Mistake in Assessment:
The Tribunal held that the assessment on AOP based on a different 'person's' return was a clerical/technical mistake. The Commissioner of Income-tax (Appeals) corrected this mistake, treating the assessment as one made on an unregistered firm (URF) instead of an AOP. The Court upheld this view, emphasizing that the appellate authority has wide powers to correct errors under section 251 of the Act.

4. Jurisdictional Error in Assessment Order:
The applicant argued that the assessment order passed on AOP suffered from a serious jurisdictional error. The Court rejected this argument, stating that the Income-tax Officer had computed the income treating the applicant as a firm and the error in mentioning the status as AOP was technical. The Commissioner of Income-tax (Appeals) rightly corrected the status to URF, and the Tribunal sustained this correction.

5. Consideration of Legitimate Outgoings:
The Tribunal did not consider the legitimate outgoings in the form of entire purchases of gas cylinders. The Court noted that the Commissioner of Income-tax (Appeals) and the Tribunal found the purchases to be bogus, supported by categorical findings and positive evidence. Therefore, the question of legitimate outgoings did not arise, and the Tribunal's decision to disallow the alleged purchases was justified.

Conclusion:
The Court answered all the questions except the first two in favor of the revenue and against the assessee. The issues regarding the technical error in the status of the assessee and the bogus nature of the purchases were resolved by upholding the decisions of the Commissioner of Income-tax (Appeals) and the Tribunal. The remaining questions were deemed academic and returned unanswered. The parties were left to bear their own costs.

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